You probably know Equifax (NYSE:EFX) as one of the three credit bureaus, the folks who keep up with your payment history and credit score. What you may not realize is how powerful a database the company has assembled, and how that database is the key to above-average earnings growth over the foreseeable future.
When CEO Rick Smith came to Equifax from GE in 2005, his emphasis was on moving up the value chain with customers. First that required developing a better database of information, and that has led to some important acquisitions. The biggest was TALX, a company that maintains employment and income data on individuals. You can imagine the power of a database that combines your payment history with your income and employment status. Other acquisitions have added different sources of data, such as brokerage account information, which can provide customers with a rich view of a consumer's financial life.
Armed with a better database, the company has focused on adding analytics. So Equifax is no longer just providing data; it can now make the best prediction in the marketplace about how good a credit risk someone will be. The value to the bank (or other grantor of credit) is enormous. If you want to extend $10,000 of credit to someone, how much would you pay to lower the odds of making a bad loan by 10%? That gives you an idea of the value Equifax can provide its customers.
The franchise is very difficult to replicate. Assembling the same database of information may be impossible and would certainly be expensive. Then a new entrant would have to analyze the data as effectively as Equifax does. Finally, the new player would have to extricate Equifax from its embedded position within the bank's daily operations. When a new customer comes in asking for a mortgage, the bank uses the Equifax decisioning tools that have become a part of the bank's systems. Those tools don't just say yes or no to the mortgage, they can also suggest other products the customer should be offered, like a credit card. The switching costs for a bank to replace Equifax would be high, making Equifax's position secure.
About 25% of revenues come from international operations, much of which is in Latin America. These markets are less mature and offer better growth than the US. Equifax also offers Personal Solutions for individuals worried about their credit score and identity theft. Finally, Equifax has added a D&B-type piece where the company provides the same kind of credit information on smaller businesses. That business seems to have gotten big enough now to compete with D&B.
What kind of growth should we expect from Equifax? The core business probably grows 2-3% annually, basically with GDP. Growth from new products, international expansion and moving into newer verticles (like health care and insurance) should add an additional 2-3%. I expect margins to grow over time for a few reasons:
1) the marginal cost of accessing a database is very low, so as the core business grows margins will move up, 2) international margins are 8-10% below US margins, and that gap should narrow as international matures, and 3) Rick Smith's GE heritage means the company will run lean with SG&A growing more slowly than revenues. Let's assume margins add 1-2% to EPS growth each year. Finally, the business throws off considerable cash flow. It is an information business after all and requires little capital to grow. Through buybacks and acquisitions, we should see another 3-4% growth.
Add it all up and you get about 9-11% EPS growth in a "normal" year, well ahead of the historical growth in S&P 500 earnings. With better-than-average growth and a far better-than-average franchise, I would expect Equifax to trade at a significant premium to the market. Yet it currently trades at just a slight premium, with a 13x P/E vs the market P/E of about 12x (I actually value the stock based on cash flow, but I realize P/E is the more common metric). With the stock trading below $32, I view Equifax as a buy.